If there is anything the COVID-19 pandemic has taught us about finances, it is the importance of having an emergency fund. In April 2020, the number of unemployed persons who reported temporary layoffs hit 18.1 million. Those individuals reporting permanent job loss rose to 2 million.
As areas of the country begin to reopen, and workers slowly start to return to their stations, many are contemplating how they can buffer themselves should something this disastrous happen again.
Here are three ways to squirrel money away for emergencies.
- Keep some cash on hand. In the show “Breaking Bad,” the main character initially stores giant wads of money in their air return. And we have probably all heard stories about the older relative or friend who hoarded cash in their mattress or buried in the yard. Don’t do that. It is both excessive and predictable.
While many people have come to rely on their debit cards, credit cards, and mobile payment options, cash is still incredibly useful in emergencies. Natural disasters such as hurricanes, tornadoes, earthquakes, mudslides, and pandemics can severely limit access to electronic forms of payment and account access.
Experts recommend keeping enough cash on hand to cover shelter, food, and travel expenses for up to three days. If your household consists of more than one person, that amount should increase to include the other members. This amount will vary widely based on location due to differing costs of goods and services.
As for where to keep that money, create a list of mundane but memorable places. Then, perform an internet search for places to stash cash in your home. Scratch any of the places which appear on that search off of your list. Use one of the remaining ideas.
- Invest in a high-yield savings account. Not all savings accounts are created equal. Most of them have ridiculously low-interest rates. And let’s be honest, stashing your money in an account with a 0.01% return is not going to provide very much growth.
Your goal for a savings account should a return at or around current inflation rates. As of April 2020, that rate was 0.03%. But rates have fluctuated between 0.7% and 3% since 2010.
Several financial institutions currently offer 1.25% – 1.61%. However, it is essential to investigate these annual yields to determine how often the rates fluctuate, minimum opening deposit requirements, and minimum balance stipulations.
Note: The APYs (Annual Percentage Yield) shown are as of April 30, 2020. Bankrate’s editorial team updates this information regularly, typically biweekly. APYs may have changed since they were last updated. The APYs for some products may vary by region. Bankrate.com
- Store money in a Certificate of Deposit (CD). Even if you put your money in a high-yield savings account, the interest rate is highly likely to fluctuate over time. A CD locks in a specific interest rate, similar to that of high-yield savings, for a particular period of time, usually twelve months or more.
The trade-off is that you agree not to access the funds in your CD for that same duration. So, a one-year CD ties up your money for twelve months. A five-year CD holds your cash for those five years. To enforce the no-access policy, most CDs include penalties for early withdrawal, such as loss of all interest earned.
While there are some CDs available that do not require a minimum deposit, it is essential to remember that the returns are relatively low. Placing $20 in a five-year CD at 1.5% will only net you an additional $1.55. It is for this reason most financial experts recommend a minimum deposit of $2,000.
Current events have caused many people to reconsider their approach to handling emergencies. For others, it has been a wake-up call to begin putting together a disaster plan. Cash, savings, and CDs are three ways to help you save money and be prepared for the next big event in your life.